Chapter 4 — Subsequent Accounting for Intangible Assets

4.3 Intangible Assets Subject to Amortization

ASC 350-30

35-6 A recognized intangible asset shall be amortized over its useful life to the reporting entity unless that life is determined to be indefinite. If an intangible asset has a finite useful life, but the precise length of that life is not known, that intangible asset shall be amortized over the best estimate of its useful life. The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method shall be used.

ASC 350-30-35-6 (see above) addresses how an entity would amortize (1) indefinite-lived intangible assets and (2) finite-lived intangible assets when the useful life is unknown. In addition, ASC 350-30-35-7 states that “[a]n intangible asset shall not be written down or off in the period of acquisition unless it becomes impaired during that period.”

Example 1 in ASC 350-30-55-2 through 55-4 illustrates the estimation of the period of amortization for a finite-lived intangible asset.

ASC 350-30

Example 1: Acquired Customer List

55-2 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-3 A direct-mail marketing entity acquired a customer list and expects that it will be able to derive benefit from the information on the acquired customer list for at least one year but for no more than three years.

55-4 The customer list would be amortized over 18 months, management's best estimate of its useful life, following the pattern in which the expected benefits will be consumed or otherwise used up. Although the acquiring entity may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list relate only to the customers on that list at the date of acquisition (a closed-group notion). The customer list would be reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

4.3.1 Amortization Method

ASC 350-30-35-6 states, in part, that the method of amortizing an intangible asset “shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up” and that an entity should use a straight-line method of amortization only “[i]f that pattern cannot be reliably determined.”

Paragraph B54 of FASB Statement 142 contained the following additional discussion regarding use of the straight-line method to amortize an intangible asset:

In considering the methods of amortization, the Board noted that Opinion 17 required that a straight-line method be used to amortize intangible assets unless another method was demonstrated to be more appropriate. However, the Board also noted that circumstances may exist in which another method may be more appropriate, such as in the case of a license that entitles the holder to produce a finite quantity of product. The Board therefore concluded that the amortization method adopted should reflect the pattern in which the asset is consumed if that pattern can be reliably determined, with the straight-line method being used as a default.

Nevertheless, while the above example of a license that permits production of a finite quantity of product may illustrate a reliably determinable pattern of consumption, other situations may not be as clear. For example, if the license instead allowed for unlimited production over a finite period, it is not clear whether the asset should be viewed as consumed on the basis of the estimate of production or on the basis of a lapse in time (since the holder of the right has unlimited access equally throughout the license period).

We believe that it would be unusual for an entity to be able to support a back-ended amortization method in which the accumulated amortization would be less than the accumulated amortization under the straight-line method. For most intangible assets that have patterns of consumption other than straight-line patterns, the benefits are generally skewed toward the earlier years. Consequently, we believe that it would be very unusual for an intangible asset to have a pattern of amortization in which the expense is greater in later years.

SEC Considerations

We understand that when the pattern of economic benefit to an entity can be reliably determined, the SEC staff has accepted the use of the straight-line method of amortization over a shorter period if the difference between such amortization and that under an accelerated method would not be material. Entities should carefully evaluate the materiality of such differences.

The SEC staff may inquire about the amortization method chosen for customer-related intangible assets (e.g., straight-line vs. accelerated) and has requested that registrants explain their key assumptions about the expected future cash flows from an acquired customer-related intangible asset to support their chosen amortization method.

When an entity uses a method of amortization based on the estimated cash flows used in the valuation of the asset, questions have arisen about whether the cash flows used in calculating the ratio of estimated period cash flows to total cash flows should be discounted or undiscounted. Paragraph B12 of the FASB’s proposed FSP FAS 142-d addressed this issue as follows:

The provisions of this FSP require that upon the acquisition of a renewable intangible asset the fair value of the asset be attributed to the initial contractual period of use and all future renewal periods based on the relative value of the discounted cash flows of each period compared with the total discounted cash flows. The Board discussed whether this attribution should be based on discounted or undiscounted cash flows. The Board noted that in Issue 03-9 the Task Force discussed an amortization methodology that would have been based on undiscounted cash flows. The Task Force decided on the use of undiscounted cash flows to avoid a downward sloping amortization curve for assets with ratable cash flows due solely to the time value of money. The Board observed, however, that the asset’s fair value determination by an income approach uses discounted cash flows and, therefore, consistent with paragraph 12 of Statement 142, using discounted cash flows for the attribution of amortization expense better represents the pattern of consumption of the economic benefits of the asset.

While the FASB ultimately issued guidance on determining the useful life of intangible assets, it did not specifically address the method of amortization. Consequently, we believe that if an entity amortizes an asset on the basis of the ratio of period cash flows to total cash flows, it can elect to use either discounted or undiscounted cash flows to determine the pattern of amortization; however, using discounted or undiscounted cash flows is an accounting policy that should be consistently applied to all intangible assets subject to amortization. The following example illustrates the difference between the amortization expense recognized when discounted cash flows are used to determine the ratio and that recognized when undiscounted cash flows are used to determine the ratio:

Example 4-2

On January 1, 20X1, Company A acquires Company B in a transaction accounted for as a business combination. As part of the acquisition, A acquires a technology-related intangible asset, Asset X. Asset X has an estimated useful life of five years, and the sum of X’s undiscounted cash flows is $1,200. If a discount rate of 9.75 percent is assumed, the present value of the cash flows associated with X would be $950. The following table illustrates the difference in the amortization expense that A would recognize each year depending on whether it uses a ratio based on undiscounted or discounted cash flows to amortize X:

4.3.2 Residual Value

ASC 350-30

35-8 The amount of an intangible asset to be amortized shall be the amount initially assigned to that asset less any residual value. The residual value of an intangible asset shall be assumed to be zero unless at the end of its useful life to the entity the asset is expected to continue to have a useful life to another entity and either of the following conditions is met:

The reporting entity has a commitment from a third party to purchase the asset at the end of its useful life.
The residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset's useful life.

ASC 350-30-35-8 states that “[t]he amount of an intangible asset to be amortized shall be the amount initially assigned to that asset less any residual value” and that this value is presumed to be zero unless one of the two conditions in that paragraph (see above) is met.

Example 2 in ASC 350-30-55-5 through 55-7 illustrates the amortization of an intangible asset that has a residual value.

ASC 350-30

Example 2: Acquired Patent

55-5 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-6 An acquired patent expires in 15 years. The product protected by the patented technology is expected to be a source of cash flows for at least 15 years. The reporting entity has a commitment from a third party to purchase that patent in 5 years for 60 percent of the fair value of the patent at the date it was acquired, and the entity intends to sell the patent in 5 years.

55-7 The patent would be amortized over its five-year useful life to the reporting entity following the pattern in which the expected benefits will be consumed or otherwise used up. The amount to be amortized is 40 percent of the patent's fair value at the acquisition date (residual value is 60 percent). The patent would be reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

4.3.3 Impairment Testing of Intangible Assets Subject to Amortization

ASC 350-30

35-14 An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 by applying the recognition and measurement provisions in paragraphs 360-10-35-17 through 35-35. In accordance with the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10, an impairment loss shall be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited.

Long-lived assets, including intangible assets subject to amortization, are tested for impairment in accordance with ASC 360-10. Under ASC 360-10, long-lived assets are accounted for, and tested for impairment, differently depending on the entity’s intent regarding the assets. Long-lived assets that the entity intends to hold and use in its operations, including long-lived assets that the entity intends to abandon, distribute to owners, or exchange in a nonmonetary transaction that is accounted for at the assets’ carrying amount, are tested for impairment at the asset group level when a triggering event occurs by using a two-step recoverability test. By contrast, long-lived assets that the entity intends to sell are tested for impairment as part of the disposal group upon classification as held for sale and in each subsequent reporting period by comparing their carrying amount with their fair value less costs to sell. See Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations for more information.

In addition, if an entity determines that the useful life of a finite-lived intangible asset has decreased (see Section 4.5.1), the entity should consider whether the asset should be tested for recoverability in accordance with ASC 360-10. See Sections 2.2 and 2.7 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations for more information.

4.3.4 Reacquired Rights

An entity may reacquire a right that it had previously granted to another entity to use one or more of the entity’s recognized or unrecognized assets. Examples of such rights include a right to use an entity’s trade name under a franchise agreement or a right to use an entity’s technology under a technology licensing agreement. Such assets are called reacquired rights.

Reacquired rights are an exception to the measurement principle in ASC 805-20. ASC 805-20-25-14 requires that an entity measure a reacquired right on the basis of the related contract’s remaining term, regardless of whether market participants would consider potential contract renewals in determining the right’s fair value. While market participants would generally reflect expected renewals of the term of a contractual right in their fair value estimate of a right traded in the market, the FASB has observed that an acquirer that controls a reacquired right could assume indefinite renewals of its contractual term, effectively making the reacquired right an indefinite-lived intangible asset. The Board has therefore concluded that a right reacquired from another entity is no longer a contract with a third party and, in substance, has a finite life. Accordingly, reacquired rights are measured only on the basis of the remaining contractual term.

Since a reacquired right is measured only on the basis of its remaining contractual term, ASC 350-30-35-2 states that “a reacquired right recognized as an intangible asset is amortized over the remaining contractual period of the contract in which the right was granted.” It would be unusual for an entity to conclude that a reacquired right has an indefinite life. If this is the case, the entity should consider discussing the issue with its accounting advisers and the SEC staff on a prefiling basis. ASC 350-30-35-2 goes on to say that “[i]f an entity subsequently reissues (sells) a reacquired right to a third party, the entity includes the related unamortized asset, if any, in determining the gain or loss on the reissuance.” See Section 4.3.7.1 of Deloitte’s Roadmap Business Combinations for more information about the initial measurement of, and subsequent accounting for, reacquired rights.

4.3.5 Defensive Intangible Assets

ASC 350-30

25-5 A defensive intangible asset, other than an intangible asset that is used in research and development activities, shall be accounted for as a separate unit of accounting. Such a defensive intangible asset shall not be included as part of the cost of an entity's existing intangible asset(s). For implementation guidance on determining whether an intangible asset is a defensive intangible asset, see paragraph 350-30-55-1. For guidance on intangible assets acquired in a business combination or in an acquisition by a not-for-profit entity that are used in research and development activities (regardless of whether they have an alternative future use), see paragraph 350-30-35-17A. For guidance on intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise), see Subtopic 730-10.

Pending Content (Transition Guidance: ASC 805-60-65-1)

25-5 A defensive intangible asset, other than an intangible asset that is used in research and development activities, shall be accounted for as a separate unit of accounting. Such a defensive intangible asset shall not be included as part of the cost of an entity's existing intangible asset(s). For implementation guidance on determining whether an intangible asset is a defensive intangible asset, see paragraph 350-30-55-1. For guidance on intangible assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are used in research and development activities (regardless of whether they have an alternative future use), see paragraph 350-30-35-17A. For guidance on intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise), see Subtopic 730-10.

35-5A This guidance addresses the application of paragraphs 350-30-35-1 through 35-4 to a defensive intangible asset other than an intangible asset that is used in research and development activities. A defensive intangible asset shall be assigned a useful life that reflects the entity's consumption of the expected benefits related to that asset. The benefit a reporting entity receives from holding a defensive intangible asset is the direct and indirect cash flows resulting from the entity preventing others from realizing any value from the intangible asset (defensively or otherwise). An entity shall determine a defensive intangible asset's useful life, that is, the period over which an entity consumes the expected benefits of the asset, by estimating the period over which the defensive intangible asset will diminish in fair value. The period over which a defensive intangible asset diminishes in fair value is a proxy for the period over which the reporting entity expects a defensive intangible asset to contribute directly or indirectly to the future cash flows of the entity.

35-5B It would be rare for a defensive intangible asset to have an indefinite life because the fair value of the defensive intangible asset will generally diminish over time as a result of a lack of market exposure or as a result of competitive or other factors. Additionally, if an acquired intangible asset meets the definition of a defensive intangible asset, it shall not be considered immediately abandoned.

Sometimes, an entity may acquire an asset that it either does not intend to use or intends to use in a manner other than its highest and best use. Such an asset is commonly called a defensive intangible asset, which the ASC master glossary defines as “[a]n acquired intangible asset in a situation in which an entity does not intend to actively use the asset but intends to hold (lock up) the asset to prevent others from obtaining access to the asset.” For example, an entity may decide not to use the acquired trade name of a competitor but may intend to keep the name (rather than sell it) solely to prevent others from using it. In this case, the asset is determined to have value to the acquirer albeit defensively (i.e., since the entity is denying others access to the asset’s use).

When measuring the fair value of a defensive intangible asset in accordance with ASC 820, an acquirer should assume its highest and best use by market participants, even though the entity is not actively using the intangible asset. ASC 350-30-35-5B further clarifies that “[i]f an acquired intangible asset meets the definition of a defensive intangible asset, it shall not be considered immediately abandoned.”

Under ASC 350-30, defensive intangible assets are generally assigned a finite life. Therefore, when testing such assets for impairment, an entity follows the process described in ASC 360-10-35-15 through 35-36. When testing long-lived assets for impairment, the entity should first consider whether evidence indicates that the carrying value of the defensive intangible asset may not be recoverable. If the defensive intangible asset is not recoverable, the entity should record an impairment loss, which is measured as the difference between the asset's carrying amount and its fair value.

Under ASC 360-10, impairment testing is performed at the asset-group level (i.e., “the lowest level for which identifiable cash flows are largely independent”). Because the defensive intangible asset does not have its own direct cash flows, it would be included in an asset group containing the asset for which it is indirectly providing cash flows. The fair value of a defensive intangible asset, as well as the asset’s carrying value as it is amortized, generally decreases over time.

ASC 350-30-55-1 through 55-1B provide the implementation guidance below on defensive intangible assets.

ASC 350-30

55-1 This implementation guidance addresses the determination of whether or not an intangible asset meets the definition of a defensive intangible asset. A defensive intangible asset could include any of the following:

An asset that the entity will never actively use
An asset that will be used by the entity during a transition period when the intention of the entity is to discontinue the use of that asset.

55-1A Paragraph not used.

55-1B The determination of whether an intangible asset is a defensive intangible asset is based on the intentions of the reporting entity and that determination may change as the reporting entity's intentions change. For example, an intangible asset that was accounted for as a defensive intangible asset on the date of acquisition will cease to be a defensive asset if the entity subsequently decides to actively use the asset). Examples 9C and 9D (see paragraphs 350-30-55-28G through 55-28L) illustrate the determination of whether an acquired intangible asset is a defensive intangible asset.

In addition, Examples 9C and 9D in ASC 350-30-55-28G through 55-28L illustrate the application of the implementation guidance in ASC 350-30-55-1 through 55-1B.

ASC 350-30

Example 9C: Trade Name

55-28G This Example illustrates the application of the implementation guidance in paragraphs 350-30-55-1 through 55-1B on the determination of whether an intangible asset meets the definition of a defensive intangible asset.

55-28H Entity A, a consumer products manufacturer, acquires an entity that sells a product that competes with one of Entity A's existing products. Entity A plans to discontinue the sale of the competing product within the next six months, but will maintain the rights to the trade name, at minimal expected cost, to prevent a competitor from using the trade name. As a result, Entity A's existing product is expected to experience an increase in market share. Entity A does not have any current plans to reintroduce the acquired trade name in the future.

55-28I Because Entity A does not intend to actively use the acquired trade name, but intends to hold the rights to the trade name to prevent others from using it, the trade name meets the definition of a defensive intangible asset.

Example 9D: Internally Developed Software

55-28J This Example illustrates the application of the implementation guidance in paragraphs 350-30-55-1 through 55-1B on the determination of whether an intangible asset meets the definition of a defensive intangible asset.

55-28K Entity A acquires a group of assets, one of which is billing software developed by the selling entity for its own use. After a six month transition period, Entity A plans to discontinue use of the internally developed billing software. In valuing the billing software in connection with the acquisition, Entity A determines that a market participant would use the billing software, along with other assets in the asset group, for its full remaining economic life — that is, Entity A does not intend to use the asset in a way that is at its highest and best use. Due to the specialized nature of the software, Entity A does not believe the software could be sold to a third party without the other assets acquired.

55-28L Although Entity A does not intend to actively use the internally developed billing software after a six month transition period, Entity A is not holding the internally developed software to prevent others from using it. Therefore, the internally developed software asset does not meet the definition of a defensive intangible asset.

See Section 4.10.4.8 of Deloitte’s Roadmap Business Combinations for more information about the initial measurement of and subsequent accounting for defensive intangible assets. Also see Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations for more information about testing defensive intangible assets for impairment.

4.3.6 Environmental Credits

An increasing number of entities aim to reduce global greenhouse gas emissions. While many are taking steps to reduce their own carbon emissions, these efforts may not be sufficient to achieve required or voluntary emission commitments.

Environmental credits (e.g., carbon credits [both allowances and offsets], renewable energy certificates and other climate- or emission-related credits) can help entities accomplish their carbon emission reduction targets and goals. Because environmental credits have grown in popularity and are not explicitly addressed in U.S. GAAP, questions have emerged regarding the accounting and reporting for such credits.

For more information about the accounting and reporting considerations related to environmental credits, see Deloitte’s October 7, 2022 (updated May 11, 2023), Accounting Spotlight.

Changing Lanes

The FASB has an active project on its agenda with respect to accounting for environmental credit programs. The project is intended to improve the recognition, measurement, presentation, and disclosure requirements for environmental credits. Practitioners should monitor this project for any developments that might change current practice.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.